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- Key US bond yields fell to six-month lows Friday as traders ramp up bets the Fed is near the end of its rate-hike cycle.
- Odds of a pause in rate hikes in May soared to 90% and investors are pricing in potential for a June rate cut.
- The 2-year yield dropped to 3.59% and sharp moves of 20 basis points have "become the norm," said one investment firm.
A rally in the US bonds Friday pulled widely watched Treasury yields to six-month lows, with traders ramping up bets the Federal Reserve is on the cusp of ending its most aggressive rate-hike cycle in decades.
The 2-year Treasury yield, which is highly sensitive to views on US monetary policy, sank 22 basis points to 3.598%, hitting levels not seen since mid-September.
The 10-year yield, a gauge of repayment costs for consumer loans and other debt, fell 10 basis points to 3.298%, also driving to areas last seen in September. Prices and yields move inversely.
The yields extended this week's slide into Friday's session with nerves frayed by ongoing worries about banking system stability. German lender Deutsche Bank was Friday's flashpoint after the cost of insuring its debt soared by a record amount Thursday.
More broadly, "FX markets have been in a risk-off mode, as equities continue to struggle on lingering concerns over the health of the global banking system," Fawad Razaqzada, market analyst at Forex.com, wrote in a Friday note.
"The market's feeling is that the major central banks are going to pause their rate hiking and soon think about cutting rates as the global economic activity slows down as the impact of one of the fastest central bank tightening cycles filters through the economy," he wrote.
Bets that the Fed will pause rate hikes then turn to cutting rates this summer jumped Friday. The probability of a May pause soared to 95.3% on Friday from 76% a day earlier, according to the CME FedWatch tool.
Meanwhile, traders were pricing in 60.3% odds of a quarter-point rate cut in June versus 30% on Thursday.
Fed Chairman Jerome Powell this week said policy makers did consider holding off on a rate hike for its March meeting in light of the turmoil hitting US regional banks following the collapse of SVB. It opted to raise rates by 25 basis points to signal its commitment to lowering inflation to its 2% target.
But the recent events "are likely to result in some tightening credit conditions for households and businesses and thereby way on demand on the labor market," Powell said Wednesday.
On Friday, European bank stocks dropped sharply, indicating investors remain rattled by last week's emergency $3.2 billion buyout of troubled lender Credit Suisse by UBS.
"The trouble in European markets has made its way over to US markets as bank stocks are all trading lower," said Bespoke Investment Group in a note.
"The two-year Treasury market is a perfect example where 20 basis points daily moves in yield, while previously uncommon, have become the norm," it said.